View Point

By Lowell Kalapa

Saturday, June 12, 1999

Real estate
tax hike is
foolish idea

WE watched with some amusement the debate over the city's operating and capital improvements budget for fiscal 1999-2000. However, we are disturbed that the debate evolved to a point where real property tax rates are being raised without any meaningful reduction in the city's spending plans.

In following the budget process, it seems what initially had been a looming shortfall of more than $130 million evolved into a need for an additional $27 million in real property taxes.

As proposed, the administration appeared to have trimmed $35 million in spending in comparison to last year's spending plan. We note from budget discussions, however, that the city should have saved $42 million alone in debt service costs as a result of refinancing prior debt.

What happened to the $7 million in savings?

We also note that, as originally proposed by the city administration, the budget would have necessitated -- to the tune of $21 million -- the imposition of a new garbage collection fee and an increase in the cost to play on municipal golf courses.

Yet funds were suddenly found to cover this $21 million black hole, so the politically unpopular garbage collection fee and hike on golfers did not have to be adopted.

If this is the case, how credible is the need for the $27 million in new property taxes?

Of even greater concern is that the city is following in the footsteps of the state in sacking special funds to cover general fund shortfalls and using one-time revenue realizations to fund ongoing operating costs.

Apparently, a total of $8.6 million will be transferred from the sewer fund, solid waste special fund and the H-Power fund to help bail out the operating costs of the general fund. This may help balance the budget this year, but what about next year?

We are cognizant of the political rhetoric that the increase in rates will basically be "revenue neutral," because declining property values applied against higher rates will produce the "same" tax bills as last year for most taxpayers.

Similarly, the argument is made that rates were not increased for the past few years when values were declining, so most taxpayers saw their real property tax bills go down.

Yet it is not mentioned that when real property values were rising in the late '80s and early '90s, the Council did NOT make commensurate adjustments so that bills were revenue neutral or increases were modest.

Instead, those councils lived off the windfall, and administrations added more items to the budget. Thus, the problem now confronting the city is one created by living off the windfall of rising property values and therefore rising real property tax collections.

Like the state, the city went all out to spend that money, creating new positions and adding new services. The rising property tax collections were supplemented by the infusion of TAT (hotel room tax) receipts, which the state turned over in 1990 when it too was awash in riches.

FINALLY, some will argue that a property tax hike is justifiable since rates have not been increased as values fell.

What this logic misses is that, when values were higher, the economy was stronger. The fixed cost that the real property represents of a home or a business could be accommodated because people were doing well.

This isn't the case today. With a weakened economy, even paying the same amount as last year may be the last straw for some businesses or homeowners. This is not the time to suggest that the city carry on business as usual and deliver the same level of services.

Just as much as taxpayers have had to tighten their belts, the city must also do the same. Doing business as usual does nothing more than perpetuate the economy's downward spiral.

Lowell L. Kalapa is president of the Tax Foundation of Hawaii.

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